THK CO.,LTD. FY2026 Q2 Earnings Report

Quick View

Executive Summary

Revenue and profit both increased substantially in Q2, although it should be noted that the growth in net income includes the one-time factor of profit recognized from discontinued operations. Revenue was ¥1,510.7B (+32.4% YoY), operating income was ¥224.8B (+268.9%), and profit before tax was ¥220.9B (+221.7%). Consolidated net income was ¥338.4B (+751.3%), of which net income attributable to owners of the parent was ¥337.4B (+805.3%). Of this amount, ¥154.96B was profit from discontinued operations, while profit from continuing operations alone was ¥183.41B (+335.1%). The primary drivers of the earnings increase were improved profitability in the Japan and China segments, with the operating margin expanding significantly to 14.9% from 5.3% in the previous year.

Factors Affecting Earnings Performance

【Revenue】Revenue was ¥1,510.7B, up +32.4% YoY. Segment revenue (composition ratio relative to total segment revenue of ¥1,928.7B) consisted of Japan at ¥633.5B (32.9% composition ratio, +18.8% YoY), China at ¥499.2B (25.9%, +40.9%), the Americas at ¥449.2B (23.3%, +2.4%), and Europe at ¥346.8B (18.0%, +2.4%). Growth in China and Japan drove the overall increase in revenue. Growth in the Americas and Europe remained within a broadly flat range.

【Profit and Loss】Operating income was ¥224.8B (+268.9% YoY), and the operating margin improved substantially to 14.9% from 5.3% in the previous year, an improvement of +9.6pt. The cost of sales ratio declined YoY, resulting in a gross margin of 34.3% (+4.6pt YoY), while the SG&A ratio was 19.2% (▲0.2pt YoY). SG&A growth was contained relative to revenue growth, resulting in positive operating leverage. By segment, operating income in Japan of ¥271.6B (42.9% margin) led company-wide profit, while China improved to ¥83.2B (16.7% margin, +92.0% YoY). The Americas remained low-margin at ¥5.3B (1.2% margin, ▲15.0% YoY), while Europe remained in the red at ▲¥2.9B, although the deficit narrowed by +61.3% YoY. Against total segment profit of ¥357.2B, company-wide operating income was ¥224.8B; the difference is believed to result from intersegment adjustments, including company-wide common expenses. The substantial excess of consolidated net income of ¥338.4B over profit before tax of ¥220.9B was primarily due to the recognition of ¥154.96B in profit from discontinued operations. Revenue and profit both increased.

Segment Analysis

Japan was the largest driver of both revenue and profit, with an operating margin of 42.9%, significantly above the company-wide average of 14.9%. China achieved simultaneous growth and profitability improvement, with revenue up +40.9% and operating income up +92.0%, raising its margin to 16.7%. In the Americas, revenue growth was limited to +2.4%, while operating income declined by ▲15.0%, reducing the margin to 1.2% and leaving profitability inferior to that of other regions. Europe remained in an operating loss position, although the loss narrowed by +61.3% YoY (▲¥7.5B → ▲¥2.9B). Company-wide operating income of ¥224.8B was below total segment profit of ¥357.2B, indicating that regional profitability disparities were a factor weighing down the company-wide margin.

Key Financial Metrics

【Profitability】The operating margin improved to 14.9% from 5.3% in the previous year, an improvement of +9.6pt, while the net profit margin attributable to owners of the parent expanded to 22.3% (3.3% in the previous year). However, the increase in the net profit margin includes the contribution from profit from discontinued operations of ¥154.96B, and the margin based on continuing operations alone was equivalent to 12.1%. 【Cash Quality】Operating Cash Flow (OCF) of ¥188.7B was only 0.56 times net income attributable to owners of the parent of ¥337.4B, as increases in trade receivables and inventories delayed cash conversion. 【Investment Efficiency】The total asset turnover ratio was 0.31 times on a semiannual basis, while total assets were ¥4,806.0B, representing a moderate increase of +1.6% YoY. ROE was 12.3%, primarily due to the substantial improvement in the net profit margin, while financial leverage declined slightly from the previous year to 1.74 times. 【Financial Soundness】The equity ratio improved to 57.4% (+2.1pt from 55.3% in the previous year). Total interest-bearing debt was ¥1,398.1B, and the interest-bearing debt-to-equity ratio was 0.51 times. Interest coverage based on operating income was approximately 14.1 times, indicating ample capacity to meet interest payments.

Cash Flow Analysis

Operating Cash Flow was ¥188.7B, down ▲7.1% YoY. OCF before changes in working capital was ¥231.1B, but increases in inventories (▲¥33.6B) and income taxes paid (▲¥41.9B) were negative factors, while an increase in trade payables (+¥45.1B) partially offset them. Investing Cash Flow was ▲¥236.6B, of which capital expenditures accounted for ¥86.8B; the amount also included investments in other securities and similar assets. Financing Cash Flow was ▲¥34.6B. Dividend payments of ¥137.6B were the primary cash outflow, while a certain amount of financing was obtained through short-term borrowings and other sources. As a result, free cash flow (OCF + investing cash flow) was ▲¥47.9B, a deficit exceeding the amount of dividends paid. Cash and cash equivalents were ¥1,169.2B, with the funding shortfall for the period covered by available liquidity.

Earnings Quality

Of consolidated net income of ¥338.4B, profit from continuing operations accounted for ¥183.41B, while profit from discontinued operations accounted for ¥154.96B, equivalent to 45.8% of total net income. Since the gain or loss from discontinued operations in the same period of the previous year was nearly zero (▲¥2.4B), part of the sharp increase in net income for the current period was attributable to non-recurring factors. Accordingly, underlying earnings power should appropriately be assessed based on profit from continuing operations (+335.1% YoY). Non-operating income and expenses were limited in scale, comprising financial income of ¥12.1B, financial expenses of ¥16.0B, and equity-method losses of ▲¥1.7B. Most of the recurring earnings improvement resulted from the operating level, including improvements in the gross margin and SG&A ratio. Comprehensive income was ¥303.6B, including ¥301.5B attributable to owners of the parent. The difference from net income attributable to owners of the parent of ¥337.4B was ▲¥35.9B, primarily due to negative other comprehensive income, including foreign currency translation adjustments.

Earnings Forecast and Guidance

The full-year earnings forecast is revenue of ¥3,100B, operating income of ¥480B (+232.5% YoY), net income attributable to owners of the parent of ¥548B, EPS of ¥488.97, and dividends of ¥195. The company announced revisions to its earnings and dividend forecasts during the current quarter. Based on first-half results, progress rates were 48.7% for revenue (¥1,510.7B/¥3,100B), 46.8% for operating income (¥224.8B/¥480B), and 61.6% for net income attributable to owners of the parent (¥337.4B/¥548B). The higher progress rate for net income than for revenue and operating income was primarily due to the substantial contribution from profit from discontinued operations recognized in the first half. The pace of progress in the second half should therefore be assessed based on operating-level results.

Shareholder Returns

The dividend policy targets an equity dividend rate (DOE) of 8%. The company announced a revision to the interim dividend to ¥96 and the full-year dividend forecast to ¥195 (+58.5% from the previous year's actual dividend of ¥123). The payout ratio is calculated at approximately 39.9% by dividing the forecast dividend of ¥195 by forecast EPS of ¥488.97. Share repurchases were minimal at ▲¥0.0B during the period, and shareholder returns were centered on dividends. Meanwhile, free cash flow for the period was ▲¥47.9B, indicating that dividend payments of ¥137.6B were not covered by internally generated funds. The sustainability of shareholder returns will therefore depend on a future recovery in cash generation.

Risk Factors

1. Earnings quality and cash conversion risk: Operating Cash Flow of ¥188.7B was only 0.56 times net income attributable to owners of the parent of ¥337.4B, while increases in trade receivables and inventories delayed cash conversion. Free cash flow was ▲¥47.9B, indicating that dividends were not covered by internally generated funds.

2. Regional profitability disparity risk: The operating margin in the Americas was 1.2% (▲15.0% YoY), while Europe remained loss-making at ▲0.8%. The substantial profitability gap relative to Japan (42.9%) and China (16.7%) is a factor weighing down the company-wide margin.

3. Dependence on one-time gains: Of consolidated net income of ¥338.4B, ¥154.96B (45.8% composition ratio) was profit from discontinued operations, creating a substantial gap from profit from continuing operations of ¥183.41B.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

The company's profitability exceeds the industry median and is positioned toward the upper range.

Growth and Capital Efficiency

The revenue growth rate is substantially above the industry median and represents a high growth rate within the industry.

※Source: Compiled by the Company

Key Points from the Earnings Results

1. The operating margin improved by +9.6pt YoY, driven by both an increase in the gross margin and the containment of SG&A expenses. This appears to reflect structural improvement resulting from changes in the pricing and cost structure.

2. The increase in consolidated net income of ¥338.4B (+751.3%) benefited substantially from profit from discontinued operations of ¥154.96B. The difference from profit based on continuing operations (¥183.41B, +335.1%) is an important reference point when assessing the future sustainability of EPS.

3. The fact that OCF remained at only 0.56 times net income and free cash flow was negative indicates that trends in working capital (trade receivables and inventories) and the progression of cash conversion will be key areas of focus going forward.

Theoretical Share Price (Reference Value)

This is a reference range mechanically calculated solely from publicly disclosed data using a residual income model (Ohlson-type model with an explicit five-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥3,323–¥3,521 at ±1% for the cost of equity, and ¥3,395–¥3,457 at ±0.1 for ω.

Notes:

• Because progress toward full-year forecast net income (62%) exceeds the standard level (50%), forecast EPS has been adjusted upward within a maximum range of +10% (because companies whose progress is ahead of schedule tend to outperform forecasts; the adjustment may be excessive for businesses with strong seasonality).
• Net assets as of the quarter-end are used (there is a timing difference relative to the full-year forecast).

(Calculation model: Residual Income Model / Interest Rate Base Month: 2026-07 / This value does not forecast or guarantee future share prices)

---

This report is an earnings analysis document automatically generated by AI based on XBRL earnings summary data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, after consulting professionals as necessary.

---End of Report---